Business 101: Capitalization Plans

Some business owners conduct their capital searches along the philosophical lines of "Whatever I can raise, I can use." Others rely on their business plans for a rough sense of what they'll need and how they'll use it. But there's a better way: a capitalization plan that projects your company's future capital requirements. Here are some basic guidelines:

Focus on what your company needs, not on what you believe you can raise. A. Gordon Tunstall, a financing consultant and intermediary based in Tampa, advises, "If your document makes compromises and isn't realistic, you'll lose credibility with the lenders and investors you approach for funds."

Think in terms of your company's stages of growth: each will have specific capital requirements. A detailed needs schedule will force you to apply discipline. Knowing how much money you'll need and when can help you avoid certain extremes. If you raise too much money too quickly, for example, or receive it in one big infusion, the temptation will be to burn right through it. If you raise less than you know your company will need, on the other hand, you'll have to adjust your spending plans and warn your backers and investors that you will be needing more money, all of which means an earlier-than-expected return to the capital markets.

Once you've defined and scheduled your capital needs, figure out the best source of funding for each stage of development. If, for example, you envision a series of big-ticket equipment purchases over the next couple of years, don't just finance them with a leasing company on an item-by-item basis. Instead, approach banks or nonbank lenders (such as investment houses or credit-card companies) that will allow you to move from equipment-financing deals to a general credit-line arrangement as you build a good track record. To minimize potential conflict among your backers down the road, write down for them the various sources of capital for each stage of growth and the likely payback schedules.

Schedule your activities accordingly. Do you foresee a need for venture capital in three years? If so, start some early networking now. Are you relying on excessively pricey sources of capital right now to get your growth plan off the ground? Then schedule a date on which to replace that high-cost money with a less costly alternative. If you can't make the switch when the date arrives, it's probably a warning sign that your company's development is off course.

Monitor your fund-raising progress and the accuracy of your capital-requirement projections. The sad truth is, as difficult as it is to persuade someone to lend you money or make an investment the first time, it gets even tougher each time you go back asking for more. All the more reason to have a plan that you can adjust as experience dictates.